A firm with the rating aa plans to issue one million shares, Ask an Expert

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A firm with the rating AA plans to issue one million shares of a 4 year-10% bond with face value $100. After the financial crisis this firm is downgraded to a B rating. The risk free rate is 1.5%. The default spreads are given in the table below.

What is the initial amount (before downgrading) the firm wants to raise?

Rating Default spread
AAA 0.35%
AA 0.50%
A+ 0.70%
A 0.85%
A- 1.00%
BBB 1.50%
BB+ 2.00%
BB 2.50%
B+ 3.25%
B 4.00%
B- 6.00%
CCC 8.00%
CC 10.00%
C 12.00%
D 20.00%

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